Fonterra forecast milk price wide open

Fonterra Co-operative's profit has soared but the breadth of the New Zealand forecast farmgate milk price range it announced today underlines the giant milk processor's uncertainty about global markets.

Fonterra Co-operative's profit has soared but the breadth of the New Zealand forecast farmgate milk price range it announced today underlines the giant milk processor's uncertainty about global markets.

"The wider range reflects the increased uncertainty we face in the coming season," Fonterra chairman John Monaghan said.

He said many foodservice businesses remain closed, weakening demand.

On the supply side, the EU and US had just been through the peak of their seasons, with that milk flowing into export markets and increasing competition for sales.

As a result, prices were softening across the board and, in US dollar terms, Global Dairy Trade (GDT) prices for whole milk powder were down 17 per cent since late January.

"Looking out to next season, a global recession will continue to reduce consumers' purchasing power," Mr Monaghan said.

"It is not clear what impact government interventions in the EU and US will have on curbing their milk supply, however, we expect our competitors there to put more of their milk into the product types that determine our milk price, as they chase government support programmes and favour longer-life products.

"COVID-19 adds significant uncertainty into the process of forecasting what will happen with global dairy prices over the next 15 months."

Fonterra chief executive Miles Hurrell said the global dairy market was volatile and the outlook uncertain.

"As a New Zealand dairy Co-op, exporting 95pc of our products, many of the markets we do business in have always been prone to sudden shocks and this can impact where, when and what we sell," he said.

"However, the global nature of COVID-19 is like nothing we've experienced before.

"Like other businesses, we will feel the impact of COVID-19 and its flow-on effects but how and to what extent is still uncertain."

Mr Hurrell said all three of Fonterra's business units had delivered a good performance for the year to day, despite the negative impact COVID-19 had on the foodservice business in the third quarter.

Fonterra's total group normalised Earnings Before Interest and Tax (EBIT) for the nine months to 30 April was $NZ815 million, an increase of $NZ301 million on this time last year.

The ingredients business increased its normalised EBIT by 9pc to $NZ668 million in the nine months to 30 April.

"As we said at half-year, when the COVID-19 pandemic took hold, we had already contracted a high percentage of this season's milk supply and this has helped minimise the impact of COVID-19 to date," he said.

"Overall, foodservice EBIT for the year is $NZ208 million, up 54pc from $NZ135 million - however, it was the part of our business that was most affected by COVID-19."

He said the Chinese foodservice sector's recovery began relatively quickly but was yet to return to normal.

The impact of COVID-19 across Fonterra's foodservice businesses in Oceania, South East Asia and Latin America was also likely to affect its fourth quarter results.

Mr Hurrell said the Co-op had a strong balance sheet with good cashflow and was continuing to reduce debt.

Fonterra has narrowed its 2019/2020 forecast Farmgate Milk Price range for the season to NZ$7.10 - $7.30 per kgMS, with a mid-point of NZ$7.20 per kgMS.